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- The Medicare donut hole is the term used to refer to the coverage gap you can experience after reaching out-of-pocket cost thresholds when paying for prescription drugs.
- The Medicare donut hole is closed in 2020, but you still pay a share of your medication costs.
- Your coinsurance in the donut hole is lower today than in years past, but you still might pay more for prescription drugs than you do during the initial coverage stage.
- Only about 10% of Part D plan members enter the coverage gap each year.
- New rules may change how much you pay for insulin in the donut hole and during other stages of coverage.
If you’re already enrolled in Medicare, you’ve probably heard a lot about the Part D donut hole. You may have even heard it closed as of January 1, 2020. But what does that mean for your prescription drug costs this year?
Unfortunately, closing the donut hole doesn’t mean your medications will be free once you reach the coverage gap. It does mean you’ll pay a smaller share of prescription drug costs once you’re in the donut hole, compared with prior years.
What is the donut hole?
There are four stages of Part D prescription drug coverage:
- The deductible phase
- Initial coverage
- The coverage gap (also known as the donut hole)
- Catastrophic coverage
When Medicare Part D was first introduced in 2006, you and your insurance company each had different payment responsibilities during each of these four stages. In the deductible stage, you paid 100% of your medication costs until you met your deductible. You and your insurance company shared the cost of prescription medications in the initial coverage stage until you reached a spending limit set by Medicare.
Once you crossed that spending threshold, you officially entered the donut hole and were once again responsible for 100% of your medication costs until a second threshold was met. At that point, catastrophic coverage kicked in and your insurance company paid the bulk of your medication costs.
RELATED: To learn more about Medicare costs and coverage, call: 844-259-6504.
The donut hole and the Affordable Care Act
When the Affordable Care Act (otherwise known as Obamacare) was passed, it included a 10-year plan to gradually close the donut hole. Beginning in 2011, both the insurance company and the drug manufacturers were required to pay a share of the cost in the form of prescription drug discounts once a beneficiary entered the donut hole.
As of January 1, 2020, drug costs during the coverage gap are paid in the following way:
|Generic drugs||Brand-name drugs|
|Your insurance company pays:||75%||5%|
|The drug manufacturer pays:||0%||70%|
When do you enter the donut hole in 2020?
You enter the donut hole once you and your Part D prescription drug plan hit a predetermined spending limit set by Medicare each year. Fewer than 10% of Part D plan members enter the coverage gap each year.
As of 2020, the stages of Part D coverage look like this:
- Deductible stage: The maximum Part D deductible is $435, although some plans set their deductibles as low as $0. During this stage, you pay 100% of covered medication costs according to your plan’s coverage rules, up to the deductible.
- Initial coverage: During the initial coverage stage, you and your plan split the cost of covered medications until total spending reaches $4,020. Under Medicare rules, you’re responsible for 25% of drug costs, but most plans use a flat copayment during the initial coverage stage.
- Coverage gap: As noted above, you pay 25% of prescription drug costs in the coverage gap. Your plan and the drug manufacturer cover the rest. You stay in the coverage gap (donut hole) until your total out-of-pocket spending reaches $6,350. Note that for purposes of leaving the coverage gap, out-of-pocket spending includes not only the amount you pay for medications, but also payments made on your behalf by your Part D plan and the drug manufacturer.
- Catastrophic coverage: During this stage, you pay 5% or $3.60 (whichever is more) for generic medications, and 5 percent or $8.95 for brand-name drugs. There is no maximum spending limit in the catastrophic coverage stage. You’ll pay these copays until the end of the calendar year, regardless of your total out-of-pocket costs.
The four stages of Part D Prescription Drug Coverage
|Deductible||Initial coverage||Donut hole||Catastrophic coverage|
|You pay 100% of drug costs up to your plan’s deductible, or a maximum of $435||You pay 25% (in the form of copayments) until you and your plan spend $4,020 on covered medications||You pay 25% coinsurance for covered medication. Your plan and the drug manufacturer cover the rest until you reach $6,350||You pay 5% or $3.60 for generics and $8.95 for brand-name drugs, whichever is greater. There is no out-of-pocket maximum|
What does closing the donut hole mean?
You might be wondering how the donut hole can be closed when you still have to pay 25% of your prescription drug costs.
Under Part D rules, plan members are responsible for 25% of their drug costs during the initial coverage stage. Before the Affordable Care Act closed the donut hole, members paid 100% during the coverage gap.
Now plan members pay 25% across both stages of coverage. In other words, the cost gap between initial coverage and the donut hole has now disappeared, effectively closing the donut hole.
Beware of drug cost sticker shock
Although you are technically responsible for 25% of drug costs in both stages, most people pay more for medications in the coverage gap. This is because most insurers use set copayments instead of 25% coinsurance during the initial coverage stage.
Here’s a hypothetical situation showing how that might look:
Jasper takes medication for high blood pressure and high cholesterol. He pays $5 for his generic blood pressure medicine and $35 for his brand-name cholesterol drug during initial coverage.
The actual cost of his blood pressure medicine is $3.50. The actual cost of his cholesterol drug is $250. When Jasper enters the coverage gap, he now pays just $0.88 for his blood pressure drug, but his coinsurance for the cholesterol drug jumps to $62.50.
RELATED: Find the right Medicare plan option for you here.
Insulin and the donut hole in 2020
There’s good news for Medicare beneficiaries who take insulin to manage diabetes. The Trump administration changed the way drug manufacturer discounts are calculated on insulin. Under the new rules, the drug manufacturer pays a higher portion of insulin costs, ultimately capping the copayment on insulin drugs at $35.
The new $35 copayment applies at all stages of coverage. This means insulin-dependent diabetics will not pay more than $35 for insulin, even before they meet their deductible, and while they are in the donut hole.
The new benefit is only available in Part D plans that follow the new Senior Savings Model, although the administration says most plans and drug manufacturers are participating. You can search for participating plans using the Medicare Plan Finder, then enroll in one during the 2020 Annual Election Period.
A licensed Medicare broker can also help you find a plan that best meets your prescription drug needs. Call 844-259-6504 to speak to a Medicare expert about your options today.